From today's WSJ:
Chip Maker 3Dfx Tests
Faith of Its On-Line Fans
By JASON ANDERS
THE WALL STREET JOURNAL INTERACTIVE EDITION
It has been a rough few months for investors in computer graphics-chip maker 3Dfx Interactive, but nothing was as painful as Tuesday.
The stock, which had been gradually losing ground since April, fell into a sudden, 19% plunge Tuesday in the aftermath of an earnings warning. Now, its legions of fans on the Internet may finally be losing faith.
"The news is definitely terrible and totally unexpected," wrote one participant in a message board on the Silicon Investor Web site (www.techstocks.com), before the start of Tuesday's bloodbath. "All I can say is put in your sell orders ... and hope that you get a good position in the queue. It won't be pretty."
He was right. The stock closed with a loss of 2 to 8 13/16 on the Nasdaq Stock Market on Tuesday, and things didn't get much better on Wednesday. Shares of 3Dfx regained just 1/16 through midday.
In its earnings warning, the company said it expects to post a pretax operating loss of "several million dollars" for the third quarter because of lower-than-expected product sales. The company said a gain from the settlement of a lawsuit against Sega Enterprises will help it post a profit for the quarter, but wouldn't say if it will meet analysts' estimates of 47 cents a share. (Analysts' estimates typically exclude one-time items.)
3Dfx posted a loss of seven cents a share a year ago. It expects to post its third-quarter results on Oct. 15.
3Dfx sued Sega in 1997 after it backed out of an agreement to include 3Dfx technology in a new game system. A 3Dfx spokesman says the terms of the settlement are still being worked out. The spokesman declined to comment on the slide in the company's shares.
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After the earnings warning, BancBoston Robertson Stephens downgraded its investment rating on 3Dfx shares to "buy" from "strong buy." But more disheartening to investors, the firm also revised its third-quarter estimate for the company, excluding the Sega gain, to a loss of eight cents a share, down from an earlier forecast of 52 cents a share in profit.
3Dfx's announcement resonated strongly in the on-line world, which had embraced the San Jose, Calif., company since it went public in June 1997 at $11 a share. The stock moved higher for much of its first year of trading, hitting an all-time high of 35 1/4 just last April. Message boards dedicated to the company often have been among the most active on both the Silicon Investor Web site and the Motley Fool site (www.fool.com).
An endorsement by Motley Fool helped to stir interest in the stock. The investment forum added the stock to its stock portfolio early this year, when it was trading at 25 5/8, acknowledging that the purchase might have been "the riskiest made to date." (See an earlier Heard on the Net column.)
Message board participants remained faithful to 3Dfx during the long slide since the spring. But with the latest shock, some have had enough.
"I have been listening to people say this stock is such a bargain through 24, 20, 17, 14, 12, 10 and now 8," writes one frustrated investor on a Motley Fool message board. "Honestly, I don't see how anyone can say this stock is a BARGAIN. This stock defies logic."
Many major Wall Street analysts who follow the stock still rate it as a "buy," but they note that 3Dfx operates in a particularly competitive niche of the chip market. Technology changes rapidly, and the success of such technology depends on acceptance from hardware makers and game makers -- areas where 3Dfx has enjoyed unusual success, they say.
Founded in 1994, 3Dfx is well-known for its Voodoo accelerator-chip line, which delivers complex 3-D graphics for video games. The company recently began shipping its new line, Voodoo Banshee. But because the company already controls a big part of the accelerator-chip market, a successful launch of the Banshee could leave a lot of products based on the older chips sitting on stores' shelves, analysts say.
"I think the company's reaching a certain level of saturation for its very, very popular graphics technology," says Jonathan J. Joseph, an analyst with NationsBanc. He says 3Dfx has "without a doubt" one of the most advanced and most popular graphics engines. Still, he says, "it's a very tough market to be successful over long period of time. It's not for the timid."
Fahnestock & Co. has held to its "buy" rating on 3Dfx shares, but semiconductor analyst Daniel Scovel says the firm's price target of $40 a share will likely be revised in light of the earnings warning.
"Yes, it was disappointing. But we have been a bull on the stock, and at this point we remain a bull," Mr. Scovel says. "Still, that doesn't change the volatility of this area. You need a cast-iron stomach to be playing in the PC graphics industry."
At Motley Fool, portfolio manager Jeffrey Fischer says he "seriously doubts" that 3Dfx shares will be sold from the site's portfolio this year. Mr. Fischer says Motley Fool still regards the company as an industry leader, and is anxious to see if 3Dfx rebounds in the fourth quarter.
Meanwhile, Mr. Scovel says he thinks the wild swings in 3Dfx shares are coming to an end. "We've been riding this one down like heroes here, and we're sticking with it," he says. "There is definitely an issue of faith because of the fact that they are creating a whole new market, which is not completely understood yet."
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